Financial Statement Analysis: Hilton Worldwide Holdings

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Company Overview

HiltonWorldwide Holdings Inc.is one of the largest and fastest growing hospitality companies in the world. The company is correctly positioned in the industry. We expect Hilton to grow at about 6.92% the same rate as its competitor and to maintain the median returns it currently generates. Hilton has relatively high profit margins while operating with median asset turns. Hilton's year-to-year change in revenues and earnings are better than that of its competitor. Hilton's revenue growth in recent years and current P/E ratio are both around their respective peer medians suggesting that historical performance and long-term growth expectations for the company are largely in sync.

Analytical Conclusion

Although the hospitality industry can get volatile Hilton Worldwide will continue to make strides as the company has a dedicated team coupled with an award winning portfolio and tailor made strategies for each hotel. Hence, the company will continue its operations for years to come. While Hilton has little control over external shocks, the company has the ability to adapt to its competitors, both old and new in all 104 countries and regions. Hilton worldwide is fairly valued. The company is currently valued at $19.07 billion with an anticipated value of $19.70-20B.

Net loss for the fourth quarter was $382 million, and net income for the full year was $364 million.

Diluted loss per share was $1.17 for the fourth quarter, largely driven by $513 million of non-cash corporate restructuring charges incurred prior to the spin-offs, and diluted EPS was $1.05 for the full year.

Added 354 hotels to its system in 2016, opening nearly one hotel per day in the year.

Hilton is one of the largest and fastest growing hospitality companies in the world, with a portfolio of 14 world class brands comprising over 4,900 properties with more than 800,000 rooms in 104 countries and regions. Hilton is committed to fulfilling its mission to be the world's most hospitable company by delivering exceptional experiences at every hotel, to every guest, every time. Hilton was founded in 1919 by Conrad Hilton when he purchased his first hotel in Texas, Hilton's is the most recognized hotel brand in the world. Hilton's operate its business across three segments: ownership; management and franchise; and timeshare. Hilton's strategy focuses on providing service and cost models tailored to each hotel, reflecting size, business complexity, and market environment. Hilton provide appropriate levels of engagement depending on each hotel's needs, by ensuring hotel owners are fully engaged in decision-making. This consolidated approach means Hilton maximize cost and scale efficiencies, by sharing best practice, market and trend intelligence and ensuring appropriate affordability to each hotel. For example: Hilton refine its luxury brands to deliver products and service standards that are relevant to each region. Hilton's operations are mainly concentrated in the United States, however, it has its presence in the international markets such as in Europe, the Middle East and Africa, and in the Asia Pacific region.

Operations

Hilton operates its business across three segments namely; ownership, management and franchise, and timeshare.

Ownership

Hilton is one of the largest hotel owners in the world based on the number of rooms at the company's leased, owned and joint venture properties. Hilton's diverse global portfolio of owned and leased properties includes a number of prominent hotels in major cities such as New York City, San Francisco, London, Chicago, São Paolo and Tokyo. Hilton's portfolio includes renowned hotels with significant underlying real estate value, by the end of 2016, the ownership segment had 141 hotels with 57,716 rooms. In recent years Hilton has expanded its hotel system less through real estate investment and more by increasing the number of management and franchise agreements the company has with third-party hotel owners. Hilton focuses on maximizing profitability and cost efficiency of all its portfolios by, reducing fixed costs and implementing new labor management practices and systems. For instance, Hilton has developed and executed strategic plans for each of its hotels to enhance the market position of each property. At many of its hotels Hilton has renovated guest rooms and public spaces and added or enhanced meeting and retail space to improve profitability. At certain of its hotels, Hilton is evaluating options for the adaptive reuse of all or a portion of the property to residential, retail or timeshare uses.

Management and Franchise

Hilton's management and franchise segment enables the company to manage timeshare properties and hotels and license its trademarks to franchisees. Hilton currently manages 4,734 hotels with 738,724 rooms. Therefore, this segment generates its revenue primarily from fees charged to homeowners', hotel owners and associations at timeshare properties. Hilton grows its management and franchise business by attracting owners to become a part of its system and participate in its brands and commercial services to support their hotel. On Hilton's part, these contracts require little or no capital investment to initiate and provide substantial return on investment for Hiltons. Hilton's primary management services consist of operating hotels under management contracts for the benefit of third parties, who either own or lease the hotels. Hilton earns an incentive fee based on gross operating profits and a management fee based on a percentage of the hotel's gross revenue.

For a fee Hilton franchise its trade, brand names, operating systems and service marks to hotel owners. Hilton does not directly participate in the daily operation or management of franchised hotels but its conducts periodic inspections to ensure that brand standards are maintained. Hilton approves certain aspects of development and the location for new construction of franchised hotels, in some cases, Hilton also provides the franchise with product improvement plans that must be completed in accordance with brand standards to remain in Hilton's hotel system.

Timeshare

Hilton's timeshare segment generates revenue from three primary sources: Resort Operations, Timeshare Sales, and Financing. Hilton market and sell timeshare interests owned by Hilton and third parties. The company sells timeshare intervals on behalf of third-party developers using the Hilton Grand Vacations brand. Through resort operations Hilton manages the Hilton Grand Vacations (HGV) Club, receiving annual dues, enrollment fees, and transaction fees from members. Hiltons also provides consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of timeshare intervals and revenue from servicing the loans.

Strategy

Since Hilton Worldwide was founded, the company has been among the top hospitality companies in the industry. In fact, after almost 100 years it is considered one of the largest and fastest growing corporations with the goal to deliver outstanding customer experiences and excellent operating performance. Hilton's business strategy is based on its service differentiation, the company distinguishes itself from its competitors by providing high quality service combining it with IT systems. According to Dudovki, (2016), Hilton has been focusing its strategy on digitalizing mobile services, booking channels, loyalty and data driven-personalization, and also improving guest experience and privacy.

Enhanced service offering is at the forefront of Hilton strategy. In order to allocate more of customers' travel spending to Hilton hotels, and consequently to enhance customer loyalty for the entire system of hotels and timeshare properties, the team created Hilton Honors Loyalty Program. The program rewards guests with points for each stay at any of Hilton's more than 4,900 hotels worldwide. Members can use the points earned for free hotel nights and other goods and services; moreover, it is possible to spend the points with 130 partners, among which car rental, rail, and airlines companies, credit card providers and others. The loyalty program contributed over $17 billion in terms of revenues as reported at the end of the year 2016.

Another strategy employed by Hilton is premium pricing. Hilton utilizes the premium pricing policies for its upscale services and hotels. The pricing strategy is established to emphasize, among customers, the sense of status and luxury rather than the sense of stay and dining. Through the analysis of previous performance and strategies they provide to manage future profitability. For instance, they engage with sales teams for hotels with significant group/corporate business, to ensure corporate pricing structure is maximized throughout the RFP process.

The management of Hilton believe every Hilton Worldwide property has its own unique strengths and challenges. As such they provide service and cost models tailored to each hotel, reflecting business complexity, size, and market environment. Hilton matches its service to the needs of the client's hotel, Hilton management believes that one size fits all. This consolidated approach means that Hilton maximize cost and scale efficiencies, rapidly sharing best practice, market and trend intelligence and ensuring appropriate affordability to each hotel. Hilton have focused on optimizing hotels' market share and delivering market-beating revenue per available room (RevPAR) results. Hilton's team provides thorough analysis of previous performance and strategies to drive future profitability.

Management

Hilton Executive Committee is characterized by key personnel with diverse backgrounds who were able to bring the company to the prominence it now enjoys in the hospitality industry. Among those executive are Hilton's President and Chief Executive Officer, Christopher J. Nassetta. Nassetta has been one of the most important figure in the Hilton family since 2007. With a degree in finance, Nassetta has always been close to the hospitality industry and real estate market. In fact, he worked as President and Chief Executive Officer at Host Hotels & Resorts, Inc. since 2000, and before he was Chief Development Officer for The Oliver Carr Company, one of the largest commercial real estate company in the Mid-Atlantic region. He is also involved in several non-profit organizations and volunteering.

Another central leader in this profitable company is its Executive Vice President & Chief Financial Officer, Kevin Jacobs. He began his experience at Hilton in 2008 covering various positions. He is now responsible of the company's global finance, information technology and real estate functions. As his President, Jacobs has a background in the hospitality industry working for other Hotels and Resorts corporations.

Jim Holthouser joined Hilton board as Vice President of Global Brands in 1979. He directs the brand management and customer marketing across nine consumer brands for more than 4,000 hotels. With over 20 years of experience in the restaurant, lodging, and gaming industries, Holthouser has held a series of senior management positions within Hilton in the franchising, branding, and marketing arenas.

The above mentioned key personnel are veterans in their own right with experience in hospitality and related industries, Hilton's executive team is well-positioned to accelerate its momentum. Hilton's executives collectively make a holistic team because they are from diverse background and shares common interests and values as such they all able to contribute to the holistic growth and development of Hilton Worldwide.

Markets

The hospitality industry is seasonal. It is common for Hilton and the other competitors to expect lower revenues in the first quarter of each year. According to Statista the global hotel industry in 2016 was valued at $490.06 billion. Reports by Financial Morningstar.com indicate that Hilton Worldwide is ranked among the largest player in the global hotel industry, Hilton and Marriott have the highest market share. They are followed by Wyndham's, Choice Hotel's and International Hotels Group's. The global hotel industry is fragmented. There is no single company in a position to influence or dominate the industry as no company holds more than 5% of the global market shares. Hilton is growing quickly, as it has the highest global market share by room supply of approximately 4.7%. Hilton's operations are mainly concentrated in the United States, but it has started to increase its presence in the international market. Hilton has a higher market share of 9.3 % in the United States, it has a relatively small share of 3% in other regions in the Middle East and Africa, 1.6 % in Europe, and 1.2 % in the Asia Pacific region.

Hilton faces a strong competition as a hotel, resort, residential, and timeshare manager, franchisor, developer and owner. The hotel and lodging industry inspects several elements in terms of competition, such as the attractiveness of the facility, location, quality of accommodations, amenities, level of service, room rate, public and meeting spaces and other guest services, consistency of service, brand reputation and the ability to earn and redeem loyalty program points through a global system. Hilton principal competitors on a global scale are Marriott International, Accor S.A., Carlson Rezidor Group, Mövenpick Hotels and Resorts Hongkong and Shanghai Hotels, Hyatt Hotels Corporation, Intercontinental Hotel Group, and Wyndham Worldwide Corporation.

Financial Analysis and Projections

Financial History 2014-2015

Hilton Worldwide generates revenue from three business segments namely ownership, management and franchise and timeshare which accounts for the company's strong financial results. For fiscal year ending 2015 total revenue increased from $10,505,000,000 in 2014 to 1$1,272,000,000 in 2015, showing a growth of 6%. This positive revenue is attributed to recovery in the economy. Likewise, cost of revenue also increased from $4,029,000,000 in 2014 to $4,065,000,000. These cost of revenue are consistent with the company's portfolio expansion. However as a percentage revenues, cost of revenues decreased by 2% in 2015 which is a reflection of the company's extensive cost reducing strategy, meanwhile the company's gross profit margins increased by 2.27% in 2015.

The company's selling and administrative, non-recurring, and other expenses as a percentage of revenues has shown slight increases over the past two years, which is consistent with expansions. However, the company was able to compress the cost of expenses so that these cost did not increase by more than the increase in revenues. On a per share basis, earnings showed a significant increase from $2.04 in 2014 to $4.26 in 2015, this represented an increase in performance. The company's net profit increased by 5.59% to 1,404,000,000 up from 673,000, 000, as Hilton launched its 13th brand, Tru by Hilton. Hilton's performance was as a result of the increase in revenues from owned and leased hotels in all segments and regions, with occupancy and rate increases in all regions except Middle East and Africa. Hilton's economic growth continued to drive performance, as global RevPAR increased from 3 to 5 percent. Hilton achieved record expansion and financial results in 2015 and continues to lead the industry as the largest, best-performing and fastest-growing hospitality company.

Fiscal Year ended 2016

The fiscal year ended 2016 was a record-breaking year for Hilton as the company increased its system size by 6.6% with 52,000 gross rooms opened, nearly one hotel per day was opened a total 354 hotels and started construction on nearly 77,000 rooms. The first quarter of the fiscal year 2016, was the slowest quarter for Hilton as they reported revenues of $2,750,000, 000, a 5% decrease over the corresponding period for 2015. The second quarter was the strongest quarter of the entire year, with a 9.9% revenue growth over the previous quarter. Revenues saw a consistent decline over the two last quarters.

Net income for the first quarters of the 2016 was $ 309,000,000, a 48.5% increase over the corresponding period the previous year. However the company saw a significant reduction in net income over the three last quarters, and even posted a net loss in fourth quarter of 2016, the net loss was $382 million compared to net income of $816 million for the previous period in, 2015. During the fourth quarter of 2016, Hilton incurred a tax charge of $513 million related to a corporate restructuring executed before the spin-offs, resulting in a net loss for the period.

For the fourth quarter of 2016, diluted loss per share was $1.17 compared to diluted earnings per share of $2.47 for the fourth quarter of 2015. For the fiscal year 2016, diluted EPS was $1.05 compared to $4.26 for the previous year. Net income was $364 million for the full year 2016 compared to $1,416 million for the fiscal year 2015, a 74% reduction. The company's performance for fiscal year 2016 reflect the effects of the spin-off of Park Hotels & Resorts Inc. and Hilton Grand Vacations Inc. which was completed in January 2017.

Consolidated Income Statement and Projections

Common Size

Expected

Common Size

Expected

Common Size

Actual

Actual

Actual

All numbers in thousands

Revenue

12/31/2018

12/31/2017

12/31/2016

12/31/2015

12/31/2014

Total Revenue

100%

9,661,440

100%

8,880,000

100%

11,663,000

11,272,000

10,502,000

Cost of Revenue

35.00%

3,381,504

35%

3,108,000

34.71%

4,048,000

4,065,000

4,019,000

Gross Profit

65.00%

6,279,936

65.00%

5,772,000

65.29%

7,615,000

7,207,000

6,483,000

Operating Expenses

Selling General and Administrative

42.00%

4,057,805

40.00%

3,552,000

43.40%

5,062,000

4,741,000

4,182,000

Non-Recurring

0.09%

9,000

0.17%

15,000

0.13%

15,000

9,000

9,000

Others

5.88%

568,093

6.00%

532,800

5.88%

686,000

692,000

628,000

Total Operating Expenses

Operating Income or Loss

1,645,039

1,672,200

1,861,000

2,071,000

1,673,000

Income from Continuing Operations

Total Other Income/Expenses Net

4.50%

434,764.8

1.00%

88,800

0.15%

-18,000

283,000

73,000

Earnings Before Interest and Taxes

21.53%

2,079,803

19.83%

1,761,000

15.79%

1,842,000

2,071,000

1,765,000

Interest Expense

5.00%

483072

5.00%

444,000

5.03%

587,000

575,000

618,000

Income Before Tax

13.00%

1,255,987.2

11.83%

1,050,600

10.76%

1,255,000

1,496,000

1,147,000

Income Tax Expense

5.00%

483072

5.00%

444,000

7.64%

891,000

80,000

465,000

Minority Interest

0.40%

38645.76

0.40%

35,520

0.43%

50,000

34,000

38,000

Net Income From Continuing Ops

8.00%

772,915.2

6.00%

532,800

3.05%

356,000

1,427,000

692,000

Net Income

7.60%

734269.44

6.43%

571,080

2.98%

348,000

1,404,000

673,000

Net Income Applicable To Common Shares

734,269.44

571,080

348,000

1,404,000

673,000

EPS Diluted

2.09

1.74

1.06

1.35

1.14

Average Share

350,000

329,000

329,730

1,040,000

590,350

Projections for Next Two years

Current Fiscal year ending December 2017

As Hilton separate into three distinct, publicly traded company, in order to unlock growth opportunities and to take advantage of the capital market and tax efficiencies, there seems to be a dim outlook for the upcoming year. Experts project that revenues growth will decrease by 23.80% to 8.88 billion down from 11.66 billion in 2016. This expected decline in growth is not expected to translate in a reduction in overall EPS, as EPS, are expected to increase from $1.06 to $1.74. In fiscal 2017 the company plans to roll out its new simplified business model: A market leading fee-based business as over 90% of Hilton's revenue comes from franchise fee and management fee. This new business model is expected to generate significant revenues as the company continues to lead the industry in net unit growth without significant use of capital.

Hilton intends to aggressively invest to drive revenues and manage risk. With the enhanced capabilities developed through the 354 hotels added in 2016 and the completion of a further 77,000 rooms. In addition, the company is expected to drive per unit growth due to the launch of its newest brand, Tapestry Collection by Hilton and extensive management contracts with large luxury hotels in countries such as China. However, general and administrative expense, non-recurring expenses and other expenses are projected to be flat compared to fiscal year 2016. Net profit is project to increase by 3.45% to 571,080 million.

For the fiscal year ending December 2017, Hilton expects total revenue from continuing operations to increase by more than 20% up 88 million compared to the $18 million loss in 2016. Net unit growth is expected to be roughly 50,000 to 55,000 rooms as such system-wide RevPAR is projected to increase anywhere from 1 to 3 percent compared to 2016. For the fiscal year 2017 cash available for capital return and debt prepayments is projected to be between $900 million and $1 billion. Likewise, capital expenditures for the year, excluding amounts reimbursed by hotel owners, are estimated to be between $150 million and $200 million.

Fiscal Year Ending December 2018

For the fiscal year ending December 2018, revenue are projected to increase by an average of 8.80 %, up to $9.67 billion, while earnings are expected to grow to an average of 2% to roughly $2.08 billion, showing positive prospects of continued growth. The earnings per shares are expected to show a corresponding increase from $1.74 to $2.08. Hilton is expected to drive leading investment returns to hotel owners, as hotel owners continue to invest in Hilton's system growth. Hilton is also expecting its market-leading growth to be amplified by its new brands that will bring new customers into its system and offers more opportunities for its existing customers to stay with the company.

Capitalization and Other Asset and Liability Analysis

During fiscal year 2016, in preparation for the spin-offs, Hilton entered into a series of financing transactions, of which the debt incurred by HGV and Park is the sole obligation of those entities after the spin-offs. Hilton entered into a $200 million senior secured term loan facility for HGV, the company also entered into a $750 million senior unsecured term loan facility for Park and issued two new commercial mortgage-backed securities (CMBS) loans for Park totaling $2 billion. The company also repaid $250 million on the senior secured term loan facility entered into in 2013. Finally the company borrowed $300 million on the revolving non-recourse timeshare financing receivables credit facility entered into in 2013 for HGV.

Also during the fourth quarter of 2016, Hilton repaid the outstanding balance of $3,418 million on a CMBS loan entered into in 2013 and a $450 million mortgage loan, using net proceeds from 2016 borrowings and available cash. As of December 31, 2016, Hilton had $10.2 billion of long-term debt outstanding, of which $3.0 billion is transferred to Park and $0.5 billion is transferred to HGV in connection with the spin-offs. As of December 31, 2016, total cash and cash equivalents was $1,684 million, net receivables was $1.15 billion, inventory amounted to 541 million and other current assets was 176 million.

In December 2016, Hilton paid a quarterly cash dividend of $0.07 per share on outstanding common shares, a total of $70 million, bringing total cash dividends paid in 2016 to $277 million. Hilton ended 2016 with property plant and equipment valued $8,930 million, goodwill of $5,822 million, intangible asset of $6,374 million, and other assets of $334 million the company also had deferred long term asset charge of 117 million. Hilton's total asset increased by 495 million to $26,211 million up from $25, 716 million in 2015. At the end of the 2016 the Hilton's had a working capital of $873 million, this indicates that the company has the ability to pay its short term liabilities. The current ratio is 1.33:1, which is also an indication of the company's ability to honor its short term obligations as they fall dues. Hilton's has $2,684 in total current liabilities, $20,312 million in total liabilities and total stockholders' equity of $5,899 million and decrease of 52 million over the same period in 2015. Projections indicate that along with Hilton s new simplifies business model and the separation of the three companies, the current capitalization structure Hilton should be profitable without the need for excess borrowing.

Balance Sheet for year ended 31, December 2016

All numbers in thousands

Current Assets $

Current Liabilities $

Cash And Cash Equivalents

1,684,000

Accounts Payable

2,513,000

Net Receivables

1,156,000

Short/Current Long Term Debt

171,000

Inventory

541,000

Total Current Liabilities

2,684,000

Other Current Assets

176,000

Long Term Debt

10,641,000

Total Current Assets

3,557,000

Other Liabilities

2,398,000

Long Term Investments

1,077,000

Deferred Long Term Liability Charges

4,639,000

Property Plant and Equipment

8,930,000

Minority Interest

-50,000

Goodwill

5,822,000

Total Liabilities

20,312,000

Intangible Assets

6,374,000

Stockholders' Equity

Other Assets

334,000

Common Stock

10,000

Deferred Long Term Asset Charges

117,000

Retained Earnings

-3,323,000

Total Assets

26,211,000

Capital Surplus

10,213,000

Other Stockholder Equity

-1,001,000

Total liabilities and Equity

26,211,000

Total Stockholder Equity

5,899,000

Net Tangible Assets

-6,297,000

Risk Factor

Hilton Worldwide are subject to the financial, business, and operating risks inherent to the hospitality industry, any of which could reduce the company's revenues and limits its opportunities for growth. Hilton faces significant competition from multiple hospitality providers in all parts of the world. However, the company's brand is well recognized and trusted in the market, thus this will reduce the level of competition the company faces as hospitality companies rely on their brands to drive customers base. Likewise, Hilton also face significant risk due to changes in taxes and governmental regulations that influence wage rates, prices, interest rates, construction cost and maintenance procedures, as an increase in any of the aforementioned factors would result in a significant reduction in the company's profit. Similarly, any changes in operating costs, such as energy cost, food, employee compensation, benefits and insurance is another critical risk. As the economy improves, hotel staff will have more options both in and outside the hotel industry. This means hotels are at greater risk of having their key personnel poached by their competitors. Hiring and retraining are options, but they come with additional expenses. Thus, hospitality companies must ensure worker satisfaction to ensure their staff remains motivated and content.

Conclusion and Summary

As the world economy continues to show signs of improvements, the world of travel and hospitality will to enter a new era of growth and transformation as consumer will have more money to spend on rest, relaxation and recuperation. Though Hilton has demonstrated its ability to grow and generate profits within the hospitality industry, in the future the company will experience higher growth prospects as company recently expanded across five in countries during the year 2016. Furthermore, with the separation of the company into three distinct publicly traded company Hilton, will improve its revenues, since the company is expected to unlock growth opportunities that are embedded within the three businesses and to take advantage of capital market and tax efficiencies.

With a return on asset of 4.89% (ttm), and a return on equity of 6.17% (ttm) as at December 31, 2016 investors will receive a moderate return on their investment. While analysts may have project that revenues and overall growth of the company will fall in 2017, we recommend that investors buy or hold its shares. The company's new simplified business model coupled with its highly skilled management team will generate tremendous revenues with little to no cost associated. The future of the company looks very bright and prosperous. Moreover, in 2017 earnings per share is expected to in by 60. 66% to 1.74 up from 1.06 in 2016, such strength is a great sign for investors and indicates strong future earnings.